money
Photo: Emily Metcalf
money
Photo: Emily Metcalf

By Paul Harleman – On September 4th, the state Council on Revenues lowered its projections for state general fund revenues for the fifth consecutive time. The council members specifically lowered the revenue projections for fiscal year 2014, which recently ended on June 30th, from -0.4% to -1.8%. This amounts to a loss of $76M in anticipated general fund revenues. To make matters worse, the council also lowered its projections for fiscal year 2015, from 5.5% to 3.5%. These figures amount to an additional $188M in anticipated loss of general fund revenues.

According to the council’s projections, over the course of the state’s two-year budget cycle (fiscal years 2014-2015), the state will somehow have to absorb a total loss of $264M of anticipated general fund revenues. The council’s latest forecast raises two important questions: How will this revenue forecast affect the upcoming legislative session? And, what lessons can be learned moving forward?

How will the revenue forecast affect the upcoming legislative session?

The upcoming 2015 legislative session is very important, not only because a new Governor and Senate Ways and Means Committee Chair will soon take office, but because the state legislature needs to approve a new biennial budget. This budget will lay out the state’s spending and revenue plan for the upcoming fiscal years of 2016 and 2017.

During the last legislative session, the legislature enacted a budget that was unbalanced in the long-run. This means the previous budget includes more spending as opposed to incoming revenue. This budget effectively depletes the state’s $844M general fund surplus of 2013. As table I and 2 highlights, without any additional budget cuts, the 2013 surplus will be depleted as early as 2016. On July 1, 2014, the state’s budget director Kalbert Young realized the gravity of the state’s deteriorating fiscal outlook withholding 10 percent of discretionary general fund spending for the first quarter of 2015. Although his action could certainly be applauded, in absolute terms, the 10 percent cut only amounts to $14M. Even if the budget director’s policy of 10% discretionary budget cuts is extended through all 4 quarters of 2015, this will amount to only $56M in proposed cuts. This is not enough in budget cuts to pull the state out of its current fiscal deficit position.

This all means that the upcoming legislature will have to consider the following three difficult and unpopular political decisions during the 2015 budget negotiations:

  1. Tap into the state reserves (Hurricane Relief Fund and/or Emergency Budget Reserve Fund, if permitted by law) to fund government operations beyond FY 2016;
  2. Increase general fund revenues through tax and/or fee increases; and or
  3. Cut spending.

Although the third option seems most favorable, unfortunately it will more likely be a combination of all three options that will be implemented. 

What lessons can be learned moving forward?

History indicates that cutting spending is a very unpopular and politically cumbersome process for any legislature. To move forward, it is important the new administration presents a realistic budget to the legislature that is based on conservative revenue estimates as opposed to overly optimistic revenue estimates. Although the legislature is constitutionally required to balance the budget on a two year basis, prudent fiscal management dictates that consideration be given to the long-term implications of spending decisions.

 

STATE OF HAWAII

MULTI-YEAR FINANCIAL PLAN (Council on Revenues 9/4/2014 Forecast) –

IN MILLIONS $

 

 

Actual

Est.

Est.

Est.

Est.

Est.

Est.

FY

2013

2014

2015

2016

2017

2018

2019

COR 9/4/2014

9.90%

-1.80%

3.50%

5.50%

5.50%

5.50%

5.50%

Tax revenues

5,466.9

5,370.3

5,558.2

5,863.9

6,186.4

6,526.7

6,885.6

Nontax revenues

766.1

725.5

643.0

639.0

653.0

659.0

668.0

Other (Bond Premiums & 2012 Legislation with revenue impact)

1.4

71.0

0.3

0.3

1.3

0.3

0.3

TOTAL REVENUES

6,234.4

6,166.8

6,201.5

6,503.2

6,840.7

7,186.0

7,553.9

 

PROPOSED OPERATING BUDGET-EXECUTIVE BRANCH

 

Executive Branch Program Expenditures:

ACT 122 (HB 1200,HD1,SD1,CD1)

5,944.4

6,164.9

6,321.5

6,482.1

6,646.7

6,815.5

 

Specific Appropriations:

Collective Bargaining/Specific Appropriations 2013 Acts

235.7

198.5

235.2

295.2

301.5

301.5

Other Collective Bargaining

19.2

36.3

41.4

46.2

47

47

Early Learning

22

25.2

25.5

25.5

2014 Emergency Appropriations

25.4

Other specific appropriation requests

0.7

Recapitalization of Reserves

100

Table 1 – Fiscal impact of legislation (2014)

0

9.3

1.2

1.2

18.8

18.8

Table 2 – Additional specific appropriations (2014)

-4.5

17.7

6.9

5.8

5.8

5.8

 

Payment of Unfunded Liabilities:

ACT 268/13: OPEB Increases (not included in budget)

121.6

231.9

341.8

451.4

 

Other Branches:

Legislative Branch Expenditures (includes CB)

33.3

33.9

33.9

33.9

33.9

33.9

Judicial Branch Expenditures (includes CB)

145.5

157

156.2

156.2

156.2

156.2

Office of Hawaiian Affairs

3.1

2.7

2.7

2.7

2.7

2.7

 

Lapses

-65

-65

-65

-65

-65

-65

Total Additions (Across all budget drafts):

393.4

490.4

556.1

733.3

868.2

977.8

 

TOTAL OPERATING EXPENDITURES

ACT 122 (HB 1200,HD1,SD1,CD1)

6,337.8

6,655.3

6,877.6

7,215.4

7,514.9

7,793.3

 

 

2013

2014

2015

2016

2017

2018

2019

REVENUES OVER EXPENDITURES

ACT 122 (HB 1200,HD1,SD1,CD1)

-171.0

-453.8

-374.4

-374.6

-328.9

-239.4

 

 

CARRY-OVER BALANCE

ACT 122 (HB 1200,HD1,SD1,CD1)

844

673.0

219.2

-155.2

-529.8

-858.8

-1,098.1

 

RESERVE BALANCES

Hurricane Relief  Fund

20.8

83.1

133.1

133.1

133.1

133.1

133.1

Emergency Budget Reserve Fund

24.2

126.3

176.3

176.3

176.3

176.3

176.3

 

NOTES: Executive branch program expenditures for the FY 2016 and beyond are multiplied by the 10 year compounder average growth rate of the HNL-CPI (2.54%)

SOURCES:

 

[1][1] To tap into the Emergency Budget Reserve Fund the state would need a time of emergency, economic downturn, or an unforeseen reduction in revenue, as provided by law.  Hawaii Constitution, Article VII, Sec. 6.

 

Paul Harleman is the Budget Director for the Senate Minority Research Office

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